Is the free, open and somewhat anarchic era of the internet drawing to a close? If so, what are the implications for small organisations?

There has been a lot of media attention in recent months to how various governments are attempting, with varying degrees of success, to control the internet. However governments are not the only culprits. Recently several articles have highlighted how major IT companies are turning the internet into a closed shop of “gated communities”, as one commentator put it (see Wired and Sydney Morning Herald articles).

Basically the thesis of these articles is that the big players like Apple, Google, Facebook, Amazon and Microsoft are all trying to lock in their users by the vertical integration of their software and, in many cases, hardware. In doing so they are consolidating not only market share but their effective control of the internet itself.

It’s useful to look at how this is being achieved. The first step for most of these companies was to create attractive “eco-systems” of software linked to and integrated with their core products. This has been occurring for a while; the oldest example, Microsoft Office, actually predates the web.

Apple and Google are probably the most vertically integrated and internet-savvy examples, with not only software but also their own hardware, operating systems and browsers. As well as in-house development, vertical integration has often involved buying add-ins and complementary software created by other companies. This was done to remove potential competition as much as to fill gaps in the each company’s product range.

This process started in the PC era and it has been challenged in recent years by the rise of mobile devices. As well as eclipsing computers as the dominant means of accessing the internet, these have spawned the creation of thousands of low-cost apps. In turn these apps are making profound changes to the dynamics of software purchase; why pay for expensive desktop software when a few apps on your smartphone or tablet may achieve much the same result, all for a total cost under $10?

While this development caught some companies on the hop it also provided opportunities for others, especially the two companies which have led the smartphone and tablet revolution, Apple and Google. Each has used the rise of apps to reinforce the boundaries of their respective software and hardware ecosystems. While they don’t produce the vast majority of these apps, these companies control their sale and distribution, generating an additional income stream (particularly in the case of Apple with its 30% share of all app takings).

The next step for these companies is to erect barriers to make it harder for “outside” users to access their software or for their own users to leave. Obviously Apple are past masters of the “walled garden” approach with iTunes and iOS, but recently others began playing this game even more aggressively – for example, Google has removed support for Microsoft’s Exchange ActiveSync from Gmail and for Internet Explorer 8 from Google Apps. Other companies such as Facebook and Twitter are employing similar tactics.

The result isn’t pretty and obviously raises some serious questions about the internet’s future. As Wired commentator Ryan Tate put it: “… imagine if Ford built a series of freeways where Chevys, Hondas, and other makes were banned – that’s Google+. Imagine if the Chevy Malibu drove at half speed on anything other than Chevy-owned freeways – that’s Facebook’s Instagram….“

The next step down this track for many companies is the roll-out of proprietary online storage and software. While there are some independent players such as Dropbox, it is the big companies which are now pushing their cloud-based storage solutions the hardest – Google with Google Drive, Apple with iCloud and Microsoft with Skydrive.

The online data storage and software applications are free or relatively cheap at least to start with, but of course there is a catch; each works best (or only) with the relevant company’s PC-based operating systems, browsers and software and online storage.

The final step is the adoption of subscription models to replace software purchase. Not only does this generate a consistent income stream and reduce support and distribution costs, it also further locks in users’ data, whether or not they (the users) have been persuaded to store this data in the company’s cloud. Users are also unable to reduce costs by skipping upgrade versions, a practice common in small organisations; stop the subscription and (depending on its format) you may not be able to access your own content, no matter where it is stored.

The subscription price also looks cheap, especially as it is usually expressed as a monthly payment, a model familiar to the users of mobile devices. And of course discounted subscriptions are offered for early adopters and those that that take a bundle of products. Then it is easy for companies to start gradually increasing the subscription price.

I’ve summarised this process in the diagram below. Some smaller software companies are now trying to emulate this pattern, with varying degrees of success. These companies usually have relatively specialised applications and also lack the resources and the critical mass of users that the big companies have behind them in rolling out this strategy. In future posts I’ll consider a couple of interesting examples and also discuss the implications for councils and small organisations.